Economic Commentary :: Federal Reserve Bank of Cleveland

Economic Commentary

Providing you with in-depth analysis of current economic and financial issues.

2012

Gaps versus Growth Rates in the Taylor Rule

Charles T Carlstrom and Timothy S Fuerst

There are many possible formulations of the Taylor rule. We consider two that use different measures of economic activity to which the Fed could react, the output gap and the growth rate of GDP, and investigate which captures past movements of the fed funds rate more closely. Looking at these rules through the lens of a partial-adjustment Taylor rule, we conclude that the gap rule does a better job of explaining the actual funds rate data, and provides a better rule-of-thumb for understanding historical monetary policy. Read more (PDF)

Policy Rules in Macroeconomic Forecasting Models

Todd Clark

This Commentary describes how some of the Cleveland Fed’s macroeconomic forecasting models have been modified to use a Taylor rule for monetary policy. After briefly describing the Taylor rule implementation, the article shows that the Taylor rule included in one of our models successfully captures the course of monetary policy in the most recent episode of policy tightening. Read more (PDF)

Where Would the Federal Funds Rate Be, If It Could Be Negative?

Ellis Tallman and Saeed Zaman

In the wake of Great Recession, the Federal Reserve engaged in conventional monetary policy actions by reducing the federal funds rate. But soon the rate hit zero, and could go no lower. In such environments, policymakers still think in terms of where the federal funds rate should be, were it possible to go negative. To project the "unconstrained path" of the funds rate—ignoring the zero lower bound—and to identify the key underlying shocks driving that path, we employ a statistical macroeconomic forecasting model. We find that the federal funds rate would have been extremely negative during 2009-2010. Read more (PDF)

2012-14

Alternatives to Libor in Consumer Mortgages

Mark E Schweitzer and Guhan Venkatu

Many adjustable rate mortgages in the United States are indexed to Libor. While the accuracy of this rate has recently been called into question, another issue affecting U.S. borrowers has become evident since the onset of the financial crisis. Specifically, many U.S. consumers with Libor-based loans may have been hit with substantially higher payments when their loans reset during the financial crisis than if those loans had been tied to a Treasury rate. We investigate several alternative reference rates for consumer loans and estimate their payment effects on a large sample of Libor-linked U.S. mortgages. We find that these alternatives would have delivered savings over Libor of about $25 to $45 per month and substantially more for mortgages that reset in October 2008. Read more (PDF)

2012-13

Labor’s Declining Share of Income and Rising Inequality

Margaret Jacobson and Filippo Occhino

Labor income has been declining as a share of total income earned in the United States for the past three decades. We look at the past effect of the labor share decline on income inequality, and we study the likely future path of the labor share and its implications for inequality. Read more (PDF)

2012-12

Household Formation and the Great Recession

Timothy Dunne

During the Great Recession, the rate at which Americans formed households fell sharply. Though the rate has recently picked up, it isn’t fast enough to make up for the shortfall in household formation that occurred over the last several years. An analysis of recent household formation patterns shows that the greatest shortfall occurred among young adults and that it is related to weak economic conditions. Housing choices have shifted as well, with a greater proportion of young households living in rental housing rather than owner-occupied homes. Read more (PDF)

2012-11

Americans Cut Their Debt

Yuliya Demyanyk and Matthew Koepke

The Great Recession brought an end to a 20-year expansion of consumer debt. In its wake is a lively debate about what caused the turnaround. Was it motivated by a decreased appetite for debt by consumers or an unwillingness to lend by banks? Our analysis of Equifax and Mail Monitor data shows that the major cause was most likely consumers. Read more (PDF)

2012-10

The College Wage Premium

Jonathan James

The return on educational investments has risen substantially in the past 30 years. While the primary focus has been on the college wage premium, new evidence shows that the value of going to college is affected by a host of other important educational decisions, each of which has a potential large effect on future earnings. This Commentary examines the impact of two of these other decisions on earnings: the choice of a college major and the pursuit of an advanced degree. In some cases, differences in the college major premium are as large as the college wage premium itself. Read more (PDF)

2012-09

Communication, Credibility, and Price Stability: Lessons Learned from Japan

Owen F Humpage

Over the past couple of decades, central banks have been taking steps to increase the transparency of their monetary policies through clearer communications with the public. While there are many differences between the economic challenges Japan has been struggling with in the past decade and those facing U.S. and European central bankers now, we can learn a great deal about combating deflation from Japan’s experiences. Read more (PDF)

2012-08

An Unstable Okun’s Law, Not the Best Rule of Thumb

Brent Meyer and Murat Tasci

Okun’s law is a statistical relationship between unemployment and GDP that is widely used as a rule of thumb for assessing the unemployment rate—why it might be at a certain level or where it might be headed, for example. Unfortunately, the Okun’s law relationship is not stable over time, which makes it potentially misleading as a rule of thumb. Read more (PDF)

2012-07

Technology Shocks and Unemployment in the Last Recession

Pedro S Amaral

In the latest recession, unemployment rates in the United States increased at a faster pace than in the average OECD country. Since the unemployment rate has been more sensitive to technological shocks in the United States in the past than in other OECD countries, I investigated whether increased sensitivity to such shocks was the reason for the recent relative increase in the U.S. unemployment rate. I find this was not the case. Read more (PDF)

2012-06

10 Things to Know about the Shape of Ohio’s Skilled Workforce

Timothy Dunne and Guhan Venkatu

A region’s economic performance is closely linked to the skills and knowledge of its workforce. Using college attainment as a measure of workforce skills, we examine overall trends in higher education to get a sense of where Ohio stands relative to other states. The data reveal that Ohio has made some progress, especially in improving educational attainment in its younger workers. At the same time, Ohio lags in a number of other dimensions, in particular, in its overall level of college attainment and in attracting educated workers into the state. Read more (PDF)

2012-05

Exchange-Traded Funds

Ozgur Emre Ergungor

ETFs are one of the most successful financial innovations of the last few decades. As a new, rapidly growing, and increasingly complex financial instrument, ETFs might raise concerns about the risk they pose to financial stability. While they do not seem to pose a threat at this time, ETFs did expose a weakness in U.S. stock markets during the Flash Crash of 2010: the fragmented nature of trading, which can leave some markets very shallow.

Federal Reserve Bank of Cleveland: http://www.clevelandfed.org